Trader Psychology Trader Psychology

46 THE TRADER’S JOURNAL October 2009

I am a WinnerMy whole life, I have been involved in

sports. Ice hockey, soccer, golf and tennisare the sports I loved to compete in. Playinghockey at a high level, I learned to win con-sistently. There were always teams in theleague that would win consistently whileothers lost.

When we played a team with a badrecord, they would sometimes be ahead fora while but I never worried. It was almostlike we could be down in a game, but weknew that we were going to win. This isbecause of attitude. Most of the time, nomatter the score during much of the game,we would come back and win.

The winning attitude almost always beatsthe losing attitude. Winning teams playwith one thought, that is “to win.” Losingteams also play with one thought, “not tolose.” This equates to a lack of confidenceand fear and is a recipe for consistent fail-ure.

Like many of you, I love the game of golf.I have a childhood friend who plays thegame as well. While our skill levels arenearly equal, I almost always beat him.What happens is that as soon as he hits abad shot, (and I mean a really bad shot) hecannot recover mentally. He allows this oneshot to have such an impact on his gamethat the rest of the round is a disaster forhim.

Once in a while, I have a bad shot too;we all do. The difference is that I do not letone bad shot have anything to do with mynext shot. I know that bad shots will hap-pen sometimes, which means it is actually apart of winning the game. As soon as myfriend hits a bad shot, he is finished, I win –game over.

Perception is a key tosuccessful trading. SamSeiden talks about losing

and how the perception oflosing affects a trader and

his or her results.

I Love to Win, I Hate to LoseAfter so much success in a sport growing

up, you feel there is nothing in life that youcannot do. No matter the task, not succeed-ing is never an option or thought. You canimagine my shock when I entered the trad-ing world and learned that you have to be agood loser in order to win. When I firstheard it, I thought it had to be a joke...

There is no way I am going to lose. I hatelosing – I hardly ever lose. It did not takelong to realize that this lesson was 100%true. I had losses that did not sit well withme. I tried to eliminate them but as I did, Ieliminated the winning trades, as well. Ihated losing. Slowly, I figured out the secretto trading from experience and from theadvice of a friend. It depends on your defi-nition of “losing.” In my early trading days,I had the wrong definition of the word“loss.”

Perception is EverythingThink about all of the setbacks and losses

you have had in other parts of your life –financial, relationships, job promotions,school. Haven’t they always made youstronger and led to something “better?” Inmy humble opinion, losing is a necessarypart of winning. As our founder at OnlineTrading Academy, Eyal Shahar says, “Life isall about perception.”

If I had a dollar for every time I haveheard him say that, I would not have totrade. He is so right... The key is to catego-rize. If I perceive each trading loss as a lossor losing, it is not going to sit right with mebecause I cannot stand losing! However, if Iput each trading loss in its proper place,which is in the “winning” category, sudden-ly a trading loss is a must for winning.

October 2009 47THE TRADER’S JOURNAL

Losing to WinLosing to WinLosing to WinLosing to WinLosing to WinLosing to WinLosing to WinLosing to WinLosing to WinLosing to WinLosing to WinLosing to Win

It’s All in your Perception

Trader Psychology Trader Psychology

October 2009 49THE TRADER’S JOURNAL

Figure 3

As price reached that level, there wereplenty of willing sellers – supply exceededdemand. Price quickly turned and reacheda 3:1 reward/risk profit threshold. Based onrules, the protective buy stop was moved tobreakeven meaning this was a free trade asthe risk was minimized to no loss.

Taking another “bite at the apple” wasprofitable. Had I focused on the first lossand felt bad about it, the gain on the sec-ond trade never would have happenedbecause of a fear of being wrong. Taking asmall loss in trading is not wrong at all. It isthe right thing to do and a MUST if you areever to enjoy gains.

While I was writing this piece,a couple of trading opportunitiesin S&P futures came up. With nofear of losing when tradingbecause the action is not losing itis winning. The trades weretaken.

Figure 4 (right)

This is a screen shot of myfutures trading account that I usemore for demonstration. This islive and real money, however, not a simula-tor. At the end of the day, the account had again of $1,562.50 from two trades that

were taken during the trading session – onewas a loss and the other was a win. Like LasVegas, I do not care that I was only 50%accurate that day. I know that as long as Istick to my rules, I am running a strategythat is very profitable because the odds arestacked in my favor and the risk manage-ment is proper. I know that I will onlyachieve profits if I include and accept loss-es.

When you shift your attitude and under-stand this, the word “loss” suddenly meansthe same thing as the word “win.” On thisday, the first trade was the loser. Just likeAAPL, if you beat yourself up over a loss orthink you did something wrong andbecome paralyzed by fear and failure, youwill stop executing your plan and never seethe gains.

From my experience, the rules that trulystack the odds in your favor are not thatdifficult. I go over these rules each week inthe Extended Learning Track (XLT) pro-gram. This is the easy part of my job in theprogram. The hard part is helping peopleshift their perception of loss. I meet people

48 THE TRADER’S JOURNAL October 2009

Apple Inc. (AAPL)I was in the Extended Learning Track (XLT)

class, leading a session and pointed out a tradingopportunity in a popular stock, Apple. I wentover the factors leading to this conclusion andeverything seemed fine.

Figure 1

I pointed out that area “A” on the chartappeared to be a resistance (supply) level whereselling existed. As price rallied up to that level at“B,” I was an interested seller. Some of the 300 orso people in the XLT asked about area “C.” I saidthat was also a supply level and could be a goodone but price was going to hit area “A” first. At“B,” price touched the level and actually fell for abit; the trade was profitable. A couple of dayslater, AAPL rallied through the level and wasstopped out for a loss. How could I have beenwrong? How do I deal with this loss? What waswrong with my trading plan? I should email anOnline Trading Academy instructor and figureout my mistake.

If you are thinking along the lines of the lastfew sentences, you are on the wrong mentalpath. The loss should be NO big deal and small.It should represent a tiny percentage of youraccount capital. Your position size should be

such that you are not risking morethan what you determine to be a trulyacceptable loss. You should make surethis number, which is really your ulti-mate risk, is a number that you arevery comfortable with. In my lowerrisk accounts, I keep the losses to$1000 or less. Let’s take a look.

Figure 2

Figure 2 is the AAPL profit and losswindow as the loss was taken. If the$960 dollar loss appears scary to you,then there is too much risk for yourcomfort level. If the loss itself makesyou cringe with anger or fear, you sim-ply have the wrong perception of los-ing. You have “losing” in the wrongcategory. The loss is taken and wemove on.

While area “A” shows a supply anddemand imbalance that typically caus-es price to turn, this one did not haveas much supply as I thought. As pricemoved past supply area “A,” it quicklyzoomed to supply area “C.” Applyingthe very rule-based strategy that Iemploy, it was time to short again.

Trader Psychology

50 THE TRADER’S JOURNAL October 2009

thatactually think

that I and other instructors hardly ever lose. Theywant to take our classes because they think theywill learn to never lose and only have winningtrades. We have a high winning percentage butwe certainly have losses.

None of us really like to lose, I know firsthandfrom competing in sports. However just like insports, falling down in practice is a must if youare going to skate faster. Striking out on fasterpitches is a much if you are going to make it tothe big leagues. Swinging your driver harder andslicing the ball 100 times is a must if you are evergoing to hit a straight 300-yard drive.

Imagine what would happen to a casino if theytried to eliminate their losses. They would be outof business and none of us would have a play-ground in the middle of the desert to enjoy.Losing in trading is great as long as it is properlosing. To become a professional winner, youhave to first become a professional loser. This is aroadblock that many people never overcome and

is why many people fail at mar-ket speculating. It is the fewmarket speculators with theproper perception that getpaid from those with thewrong perception – thetransfer of accounts. If youwant to change, change yourperception of loss. TTJ

Sam Seiden brings over 15 yearsexperience of equities, Forex,

options and futures trading thatbegan when he was on the floor of theChicago Mercantile Exchange where hefacilitated institutional order flow.

He has traded equities, futures, interestrate markets, Forex, options, andcommodities for his personal interestsfor years and has educated hundreds oftraders through seminars and dailyadvisory services both domestically andinternationally.

Sam has been involved in the marketssince 1991 on and off the floor of theChicago Mercantile Exchange. He hasserved as the Director of TechnicalResearch for two trading firms andregularly contributes articles to industrypublications. Sam is known for histrading, technical research andeducational guidance.